THE AMERICAN JOBS ACT

The centerpiece of BO’s $447 Billion “American Jobs Act” proposal is an extension and expansion of the “payroll tax holiday” of 2011 – the 2% reduction in employee withholding of Social Security tax.  If Congress does not act all employees will face a 2% cut in take home pay on January 1, 2012.

The new proposal calls for a 3.1% reduction of both the employee and employer share of Social Security tax – a 50% cut in the tax. 

In 2012 the employer’s share of the Social Security tax would be sliced to 3.1% for the first $5 million in wages per firm and completely eliminated for new workers and up to $50 million in increased wages for current employees.

This payroll tax holiday is the latest evolution of Dubya’s disastrous “tax rebate checks”, which created tons of confusion and FUs.  BO replaced the checks with the “Making Work Pay” credit, which FU-ed federal income tax withholding on wages and pensions and resulted in some surprise balances due on 2009 and 2010 returns.  The payroll tax holiday concept is a much more efficient method of distributing money directly to Americans then mailing out checks, but its effect on the economy is still questionable.

It is truly surprising that the biggest recipient of the 2%, and the proposed 3.1%, cut in the Social Security tax is the family with income of over $250,000 on whom BO previously wanted to increase income taxes. A husband and wife, each earning the maximum $106,800 in Social Security wages in 2011 got an additional $4,272 in take home pay. With the new 3.1% cut this will increase to $6,622 “in pocket” in 2012.

The jobs bill also includes substantial tax credits for businesses that hire returning veterans and the long-time unemployed, extending jobless benefits to the unemployed, with special emphasis on those out of work at least six months and those in low-income neighborhoods, and aid to keep laid-off teachers and first responders in their jobs and for major school construction and infrastructure renovation.

According to the official White House “Fact Sheet” the bill also includes –

+ Extending 100% expensing into 2012.

+ “Returning Heroes” tax credits from $5,600 to $9,600 to encourage the hiring of unemployed veterans.

+ Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job.

+ Modernizing at least 35,000 public schools by supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.

+ Immediate investments in infrastructure and a bipartisan National Infrastructure Bank, modernizing our roads, rail, airports and waterways while putting hundreds of thousands of workers back on the job.

+ A New “Project Rebuild”, which will put people to work rehabilitating homes, businesses and communities, leveraging private capital and scaling land banks and other public-private collaborations.

+ A $4,000 tax credit to employers for hiring long-term unemployed workers.

According to the Fact Sheet, the Act is ”fully paid for as part of the President’s Long-Term Deficit Reduction Plan”.

How?

“To ensure that the American Jobs Act is fully paid for, the President will call on the Joint Committee to come up with additional deficit reduction necessary to pay for the Act and still meet its deficit target. The President will, in the coming days, release a detailed plan that will show how we can do that while achieving the additional deficit reduction necessary to meet the President’s broader goal of stabilizing our debt as a share of the economy.”

Basically he is saying that “we will worry about how to pay for this later”.

There is a revenue-raiser in the Act.  William Perez explains over at ABOUT.COM’s Tax Planning: US (click here) –

“28% Tax Rate Limit on Itemized Deductions, Some Above-the-Line Deductions and Some Tax Exclusions

Obama proposes to limit to 28% the impact of all itemized deductions and the following adjustments to income and exclusions from income:

·         the self-employed health insurance deduction,

·         section 199 domestic production activities deduction,

·         deduction for qualified performing artists,

·         moving expenses,

·         Archer MSA deduction,

·         Student loan interest deduction,

·         tuition deduction,

·         HSA deduction,

·         exclusion for Municipal bond interest,

·         cost of employer-provided health insurance, except for flexible spending accounts, and

·         the foreign earned income exclusion.

The limitation works by increasing either the regular income tax or the alternative minimum tax to act as an offset against the deductions. Instead of a tax deduction, adjustment or exclusion achieving a tax savings at the taxpayer's highest tax rate, such as 35%, the value of the deductions would be limited to, at most, 28%. The difference between the tax savings at a taxpayer's highest rate and the 28% limit is added to either the income tax or alternative minimum tax. The limitations would take effect in 2013 for taxpayers having adjusted gross income over:

$250,000 for married filing joint,

$225,000 for head of household,

$125,000 for married filing separately, and

$200,000 for single filers.”

As an employee, and employer (I employ myself – so both halves come out of my pocket), I personally welcome the 50% cut in Social Security tax, strictly from a selfish point of view.  But, as I said earlier, I have my doubts as to the effectiveness of this provision.

I support the WPA-like provisions for creating jobs via encouraging and supporting public works projects.

And I also support tax credits for employers for hiring returning veterans and the unemployed.

While I do see the need for extended unemployment benefits for those who are genuinely looking for, and need, work, I am a bit cynical when it comes to constant extensions of unemployment benefits.  There is a tendency to become addicted to unemployment, choosing to remain “on the tit” and get “money for nothing” rather than actually earning a living. There are a large number of otherwise retired, albeit early, individuals who continue to collect unemployment as long as possible because they can, and not because of any true financial need.  And we all know stories of members of the “underground economy” who collect unemployment while working “off the books”.

But I am strongly opposed to any reduction of deductions, both above and below the line, based on one’s level of income.  I have always been against “PEP and Pease”. If a tax deduction is valid for one it is valid for all.  This is just a “back door” way of raising taxes on the “rich”.  I would much prefer doing away altogether with special interest loopholes and deductions.  And, as I have been saying for years, would do away with the deduction for depreciation of real property.

And, as a tax preparer, calculating the deduction limitation will be a PITA, and probably require a new form – although it will allow we preparers to charge more because of the increased work.

Obviously the Act will not pass in its current form.  And you can be sure that the Republicans will oppose it, not because of disagreements with its contents but solely because it is a Democratic plan.  So don’t start spending the proposed Social Security cut just yet.  I will keep you up-to-date “As the Congress Turns”.

TTFN